The Tax Cut and Jobs Act of 2017 makes it virtually impossible for taxpayers, including church employees, to deduct “unreimbursed employee business expenses” on Form 1040 income tax returns. This is especially true for pastors whose income is reported on Form W-2.
However, the tax law does not prohibit tax-free reimbursements to employees for most receipted business expenses, provided they are within the guidelines stated in the employer’s Policies and Procedures Manual or Employee Handbook. (Pastors who receive Form 1099-MISC are self-employed and must use Schedule C to report any unreimbursed business expenses.) Relocation expenses are no longer reimbursable.
I regularly encounter churches that fail to create and maintain either Employee Handbooks or P&P Manuals, believing the unwritten “way we’ve always done it” is proper, sufficient and legal. Unfortunately, if it’s not in writing, it’s not a policy! There is no way to enforce unwritten items, no matter how long “always” has been; they are as leaky as a sieve. The days of “oral tradition” ended when the Torah was first committed to manuscript scrolls by scribes about 3,300 years ago.
Accountable reimbursements are those receipted expenses the church agrees to pay that are incurred by employees in the conduct of their ministry. Employees purchase books, sermon and teaching aids, attend conferences, drive their cars on ministry-related business, and often engage in ministry matters over breakfast, lunch or dinner. When those purchases are within the scope of employment, and are intended to enhance the church, they should be paid for by the church, not by the employee with his own funds. Sadly, not all churches can afford to do this.
It is unlawful to reduce an employee’s compensation by the amount of their reimbursements, so the church cannot say to an employee, “We’ll count this expense as part of your pay.” The church may add a reimbursement plan to an employee’s regular compensation, and pay it in advance. The employee must adequately document all expenses, including providing original receipts to the church treasurer within 60 days, or must pay income tax on the unused advance not returned within that 60 days.
Ministry miles, excluding commuting from home to church, are reimbursable at the federal rate of 58 cents per mile in 2019. Employees must keep an accurate written mileage log, as opposed to turning in receipts for auto expenses (tolls and parking fees are reimbursable separately).
Like housing allowance, the church must include a line item in its annual budget or adopt a resolution (ideally before December 31) authorizing the reimbursement plan. And the church needs a written policy that identifies what expenses are or are not reimbursable. For example, CSBC’s policy does not permit ministry-related restaurant reimbursements if any alcoholic beverages are on the receipt.
Ministry employees deserve an accountable reimbursement plan. It’s up to the church to set a budget and define policies. Accountable reimbursement plans are always good stewardship.